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Cagamas Favors Islamic Bonds to Boost Investor Demand (Update2)

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Points of Essence:

  • Malaysia’s home loan buyer, Cagamas, will increase its Islamic bond sales to boost demand for Islamic bonds. As mortgage backed bonds are avoided because of the subprime issues, now sukuk has a better prospect of being the alternative. Bloomberg has the report.

By Soraya Permatasari

Nov. 20 (Bloomberg) — Cagamas Bhd., Malaysia’s biggest buyer of home loans, plans to increase sales of Islamic bonds as part of an effort to boost investor appetite for its debt after mortgage defaults triggered the global credit slump.

Cagamas, which expects to sell as much as 15 billion ringgit ($4.2 billion) of notes next year, wants overseas investors to hold about 20 percent of its bonds from about 10 percent now, Chief Executive Officer Steven Choy said in an interview on Nov. 18. About 30 percent of its bonds comply with Muslim Shariah law’s ban on interest, he said.

Borrowers sold $13.1 billion of Islamic bonds this year after raising a record $30.8 billion from the securities in 2007 as an oil boom boosted Middle Eastern wealth, data compiled by Bloomberg show. Malaysia, which accounted for two-thirds of global Islamic bond sales last year, expects sales of the notes, known as sukuk, to increase by 20 percent annually.

“Mortgage-backed bonds are not very popular right now with the subprime issue” and it may be easier for Cagamas to sell sukuk, said Jason Chong, who helps oversee $1.6 billion as chief investment officer at UOB-OSK Asset Management in Kuala Lumpur.

Bonds linked to U.S. residential mortgages slumped last week after Treasury Secretary Henry Paulson abandoned plans to buy distressed securities using money from the $700 billion Troubled Asset Relief Program, set up to try to ease the credit crisis started by U.S. subprime mortgage defaults.

Better Suited

Shariah-compliant assets may be better suited to surviving the financial crisis than their conventional peers as they are typically less exposed to gearing and risk, Malaysian central bank Governor Zeti Akhtar Aziz said today.

“In Islamic financial transactions money is not a commodity but a medium of exchange,” Zeti said in a speech at a conference in Kuala Lumpur. Islamic finance has an “in-built mechanism that enhances its prospects for soundness and stability.”

Yields on the safest types of AAA-rated U.S. commercial- mortgage bonds rose 77 basis points to a record 1,195 basis points more than benchmark swap rates yesterday after a Credit Suisse Group AG report indicated two property owners with about $334 million of loans bundled into bonds are about to default. A basis point is 0.01 percentage point.

“Although oil prices have come down, oil-rich countries are still making loads of money so there is a need to park this money somewhere,” said Chong. “Pension funds and insurance companies would look for safer paper, such as Cagamas’s, because they are backed by the government.”

Local Ratings

Unlike Fannie Mae and Freddie Mac, the mortgage-finance companies taken over by the U.S. government, Cagamas buys loans with recourse to the lenders and so isn’t at direct risk of borrower defaults, according to Choy, who has been traveling to Hong Kong, Europe and the Middle East for promotional meetings.

“Investors buy our bonds because, for the ratings that we have, we offer a higher return,” he said in Kuala Lumpur.

Cagamas, set up in December 1986, is 20 percent owned by the Malaysian central bank and buys housing loans from banks, funding those purchases by selling bonds.

Convincing Middle Eastern investors to buy Malaysian sukuk may not be easy after religious scholars advising the Bahrain- based Accounting & Auditing Organization for Islamic Financial Institutions, or AAOIFI, in February said as much as 85 percent of the securities sold to date may not fully comply with the precepts of Shariah.

Arab Compliance Concern

“There is a concern” about this issue among some Arab investors, said Wan Murezani Wan Mohamad, a fixed-income analyst at Malaysian Rating Corp. “If we manage to get players from both the Middle East and other areas on the same level playing field with regards to these scholars’ opinions then there will be a bright future for our Islamic bond sales.”

In March AAOIFI published new rules obliging borrowers to legally transfer the ownership of assets underlying sukuk to bondholders to meet Shariah’s stipulation that transactions be based on a genuine transfer of tangible assets.

Companies and their bankers rely on rulings from respected religious scholars approving their sukuk to be able to sell the securities to devout Muslims.

Cagamas’s debt, which isn’t rated by either Moody’s Investors Service or Standard & Poor’s, has the highest AAA credit rating from local Malaysian rating companies.

The company on Aug. 15 said it sold 2.02 billion ringgit of 1- to 20-year sukuk in Malaysia’s biggest sale of securities based on a commodity Murabahah. The notes were priced to yield between 4.05 percent and 6.5 percent.

The sukuk are “Gulf Cooperation Council-compliant at the primary market level,” Cagamas said in a statement at the time. The six GCC states are Saudi Arabia, Kuwait, Bahrain, Qatar, Oman and the United Arab Emirates.

A Murabahah contract is a sale and deferred-payment agreement based on an asset, usually a commodity, in which the cost and profit margin are pre-agreed to comply with Shariah.

To contact the reporter on this story: Soraya Permatasari in Kuala Lumpur at

Last Updated: November 19, 2008 23:45 EST



Written by Suapi Shaffaii

November 23, 2008 at 12:35 am

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